New Zealand succumbs to rate hikes, natural disasters, enters recession

It’s official – Australia’s neighbour next door entered a technical recession last week after the country’s economy gave in to the aggressive cash rate hikes dished out by its central bank, aimed at curbing three-decade high inflation.

It’s official – Australia’s neighbour next door entered a technical recession last week after the country’s economy gave in to the aggressive cash rate hikes dished out by its central bank, aimed at curbing three-decade high inflation.

New Zealand’s gross domestic product (GDP) experienced two consecutive quarters of contraction. With the country’s inflation tracking at 6.7%, it is yet to temper down to the target band of 1-3% set by the Reserve Bank of New Zealand (RBNZ).

Macro events in the form of January’s flash flooding in Auckland and February’s Cyclone Gabrielle had further marred New Zealand’s economy, hurting tourism, slowing consumer spending and causing nearly NZ$14 billion ($8.6 billion) in damage.

“It’s clear that the New Zealand economy is losing momentum,” Westpac senior economist Michael Gordon was noted saying. “What remains to be seen is whether things have slowed enough to put us on a path back to low and stable inflation.”

Going with the herd, the New Zealand dollar dipped to US$0.6197 – further suggesting an end to the current rate hike cycle. However, some economists expect cashed up tourists and historically high migration may boost spending and force the central bank to crack the whip.

Since October 2021, the RBNZ has enforced one of its most aggressive policy tightening campaigns since 1999 in raising the official cash rate by 525 basis points to 5.5% – the highest in more than 14 years.

As at 24 May 2023, New Zealand’s cash rate was the highest among its peers ahead of the US (5.25%) and the UK and Canada (4.50%). Around the time, RBNZ forecast the official cash rate to peak at its current level and confirmed that it will remain as such until at least the middle of 2024 to help ensure that inflation returns to its 1-3% target band.

“It is quite nice to see some of the things we were hoping would already be here actually be here. And that is the lower surprise on GDP, the decline in inflation and all the indicators that suggest the interest-sensitive parts of the New Zealand economy are yielding,” RBNZ Governor Adrian Orr said.

Meanwhile, after 12 consecutive rate hikes, Australia’s official cash rate currently sits at 4.10% and inflation is starting to show signs of slowing. After hitting a 36-year high of 7.8% in December 2022, the country’s consumer price index dipped to 7% (March 2023).With the Reserve Bank of Australia targeting 2-3% inflation, it is yet to be determined if the central bank will need to take a leaf out of RBNZ’s book and push the cash rate beyond 5%. The next RBA Board meeting and official cash rate announcement will be on the 4th July 2023.

Past performance is not a reliable indicator of future performance.

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